Japan Says Bad Bank Loans Soared by 50% in Six Months

By JAMES STERNGOLD,

Published: October 31, 1992

TOKYO, Oct. 30—
The Government reported figures today showing that Japan's financial crisis is growing more severe, despite its efforts to rescue the ailing banking sector.

The Finance Ministry reported that bad loans at major banks had soared more than 50 percent in the last six months. It also said that the toll of failed loans, mostly to the real estate sector, would continue to rise in the near future.

In another important announcement, the banks presented the outline of a long-awaited plan for writing off tens of billions of dollars of failed real estate loans. The plan calls for them to sell off their bad loans to a newly formed corporation, to be financed with money from the banks themselves. The Government insisted that not a yen of taxpayer money would be used to help the banks, but analysts said that billions of dollars in tax breaks were a keystone of the rescue package.

But financial experts dismissed the plan as inadequate, saying it was too modest given the dimensions of the bad loan problem and that it relied on financial sleight of hand rather than a clear formula for lifting the banks' burden of bad loans and getting them fresh capital.

"This is too preliminary to call a plan," said Akio Mikuni, president of Mikuni & Company, an independent credit rating agency. "It's just the start of the process of creating a plan. They're starting small and will enlarge the proposal as they need to."

There was widespread agreement among banking experts that today's report showed that the Finance Ministry was still underestimating the depth of Japan's banking problems. The banks have been battered by reckless lending practices and a severe drop in property and stock prices over the last three years.

Today's announcements also suggested that Japanese taxpayers would ultimately have to bear far more of the cost of rescuing the financial industry than the Government has admitted, these analysts said.

The problems could affect other countries as well. Japanese banks had been big lenders in overseas markets, from London to Los Angeles to New York. The Government here is already worried that the failure of the banks to increase their lending in Japan is worsening a sharp economic slowdown here. By cutting back further overseas, as many analysts expect, they could also reduce the flow of loans to businesses in the United States and elsewhere, although that would also make the Japanese banks less competitive with foreign banks in the overseas markets.

Although they were said to have understated the amount of bad loans, the figures released today by the Finance Ministry still showed a sharp deterioration in banks' loan portfolios.

As of Sept. 30, the Finance Ministry reported, loans on which no interest payments had been made for six months or more came to 12.3 trillion yen, or $100 billion at current exchange rates. While that represents a 54 percent increase from $65 billion at the end of March, most analysts said they thought that if loans being supported artificially were added, the figure would probably be closer to $244 billion. Of that amount, 4 trillion yen, or about $32.5 billion, is expected to be a total loss, a 56 percent increase from 2.56 trillion yen on March 31. These figures applied to the 21 largest commercial banks, long-term banks and trust banks.

Analysts said they doubted those numbers for several reasons. One is that if a borrower makes just one payment in six months, the loan is no longer considered nonperforming. Thus some loans might be classified as current even if the borrower is not making regular interest payments.

In addition, many borrowers are paying rates that are well below market levels, since banks have been forced to make significant concessions to keep borrowers from collapse. Interest Rate Cut

David Snoddy, the banking analyst here for Jardine Fleming Securities, pointed out that the number of loans in which banks had cut the interest rate to these low levels had been soaring. The official figures, he said, show that the amount of loans for which the interest rate is less than 3.25 percent -- which is roughly half the market rate -- jumped to 1.989 trillion yen, or $16.2 billion, in July, from 972 billion yen in March.

"The corpse is just being kept warmed over in these cases," he said.

Mr. Noguchi said he thought that of the $244 billion in loans he estimates to be nonperforming, 10 trillion yen worth are complete losses.

The Finance Ministry first announced its intention to rescue its financial system in August, after the stock market had lost more than $3 trillion in value and the economy had slid into a severe slowdown. For two years, ministry officials denied that any sort of bailout for banks was necessary. But they finally acted when the stock market plummeted to a six-year low and signs began to appear that the failure of the ailing banks to make new loans was stifling the already weak Japanese economy.

The package announced by Finance Minister Tsutomu Hata on Aug. 18 called for the bank bailout plan announced today and some accounting rule changes that permitted banks to withhold from the public certain losses they were suffering. Plan on Real Estate